Tuesday, November 21, 2017

Big Boost In Housing Construction

The Mortgage Corner

Nationwide housing starts rose 13.7 percent in October to a seasonally
adjusted annual rate of 1.29 million units after a slight upward revision to the
September reading, according to newly released data from the U.S. Department of
Housing and Urban Development and the Commerce Department. This is the
highest housing production reading since October 2016, when total starts hit a
post-recession high of 1.33 million.

And today’s huge 1.2 percent rise in the Conference Board’s Index of Leading
Economic Indicators for October (that predicts future growth trends) should
be a sign that housing construction will continue to ramp up in 2018.
Construction needs to catch up to rising household formation as more of the
millennial generation’s 18-38 year-olds—the largest generation in history—are
now forming their own living arrangements.

“The growth of the LEI, coupled with widespread strengths among its
components, suggests that solid growth in the US economy will continue through
the holiday season and into the new year,” said Ataman Ozyildirim, Director of
Business Cycles and Growth Research at The Conference Board.

Rising housing starts are because a total of 3 Quantitative Easings by the
Fed has kept interest rates at record lows since 2009; where they still are
today. For instance, the 30-yr conformed fixed rate is @ 3.50 percent for one
origination point, which was unheard of before the various QE bond buying
programs begun under Fed Chair Ben Bernanke.

I reported last week that new-home sales shot up 19 percent in September to a
consensus crushing annualized rate of 667,000. This is the largest percentage
gain in 28 years, folks, which accentuates the rising demand for housing.

The Census Bureau reported ownership increased to 63.9 percent of total
households in the third quarter, the highest level since 2014. It is creeping up
to the 65 percent historical ownership rate, but remains below the 69 percent
clocked at the peak of the housing bubble a decade ago.

“We are seeing solid, steady production growth that is consistent with NAHB’s
forecast for continued strengthening of the single-family sector,” said NAHB
Chief Economist Robert Dietz. “As the job market and overall economy continue to
firm, we should see demand for housing increase as we head into
2018.”

Regionally in October, combined single- and multifamily housing production
rose 42.2 percent in the Northeast, 18.4 percent in the Midwest and 17.2 percent
in the South. Starts fell 3.7 percent in the West.

Why has it taken so long for the housing market to recover? Fewer new
households are being formed that would require a home of their own. A 2016 San
Francisco Fed study by economist Fred Furlong on household formation
concluded:

“…ownership rates increased during the housing boom of the late 1990s and
early 2000s, but fell after 2007. Ownership rates have been driven down by
several factors including tougher credit requirements, rising foreclosures, and
deteriorating household finances since the Great Recession.”

It is also true that many young adults chose alternative residential choices
such as living with parents, other relatives, or friends. There is also a
correlation between these living arrangements and both the rise in student debt
and the decline in marriage rates.
So we know why the Fed has kept interest rates this low for almost seven
years!

“But there are signs that a readjustment is imminent,” said Furlong. “The
current population share of young adults is fairly close to the share that
existed at the start of the most recent housing boom. Also, while more young
people are living with their parents, they are forming their own households,
albeit later in life, leading to higher headship rates over time. Mr. Furlong
notes that U.S. Census Bureau projections suggest that household formations will
average about 1.5 million per year through 2020, which is much better than the
900,000 annual averages of the last 5 years.”

This will continue to boost housing demand, needless to say. Overall permit
issuance in October was up 5.9 percent to a seasonally adjusted annual rate of
1.297 million units. Single-family permits rose 1.9 percent to 839,000 units
while multifamily permits fell 9.5 percent to 458,000.

An increased supply will also help housing prices, since buying or renting a
home has become increasingly expensive for the younger generations. Continued
economic growth will also encourage more millennials—heretofore burdened with
student debt and an inadequate housing supply—to strike out on their own.

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Harlan Russell Green, Editor/Publisher

Harlan Green is a Mortgage Broker in Santa Barbara, California since the 1980s and economist. As Editor/Publisher of PopularEconomics.com, he has published 3 weekly columns-- Popular Economics Weekly, Financial FAQs, and The Mortgage Corner-since 2000, and is a featured business columnist for Huffington Post. Please refer to the populareconomics.com website for further information.